WTO Director-General Lamy: “Multilateralism is at a crossroads”

June 26, 2012 (TSR) – The World Trade Organization‘s Director-General Pascal Lamy, in a speech at the Humboldt-Viadrina School of Governance in Berlin on 26 June 2012, said that “multilateralism is at a crossroads. Either it advances in the spirit of shared values and enhanced co-operation, or we will face a retreat from multilateralism, at our own peril. Without global cooperation on finance, security, trade, the environment and poverty reduction, the risks of division, strife and war will remain dangerously real.” This is what he said:

Honourable Guests,
Ladies and Gentlemen,

It is a great pleasure to be at the Humboldt-Viadrina School of Governance to address a question that is central to the management of interdependence in today’s world — is multilateralism in crisis?

This is a valid question for environmental and sustainability matters, as we have seen in the recent Rio+20 Summit. It is true for trade and other economic issues. The G20 Summit in Los Cabos, Mexico, focused precisely on improving our collective response to the current economic turbulences. It is also among the central questions at the heart of developments in the European Union.

I am sure that today’s discussion will provide interesting insights for our own deliberations later this year.

Before turning my attention to the specific challenges facing multilateralism in today’s international architecture, let me first briefly set out the economic environment in which we are operating.

More than three years have passed since the beginning of the 2008-09 crisis and the world economy remains very fragile. World growth remains below its potential. WTO projections indicate that trade growth will further decelerate this year to 3.7 per cent, down from 5 per cent in 2011. Moreover, WTO economists believe that downside risks to an even sharper slowdown in trade growth remain high. Unemployment remains unacceptably high in many of our societies. Many of the achievements in poverty reduction over the past decade run the risk of unravelling.

And the impact of the crisis is being felt not just in developed countries but also in the developing world. The contribution of trade to growth in emerging and developing countries is decreasing. China’s dynamic economy is expected to grow more slowly in 2012. India’s growth is decelerating. Many poor countries are seeing their exports to major markets such as the EU and the US slow down.

This sluggish pace of recovery raises concerns that a steady trickle of restrictive trade measures could gradually undermine the benefits of trade openness. Although the WTO has so far deterred large-scale economic nationalism, we have to redouble vigilance on this front. History tells us that protectionist pressures will linger as long as unemployment rates remain unacceptably high. Recent history also tells us that protectionism does not protect. Given that one country’s exports are another country’ imports, such behaviour is only likely to lead to a downward spiral for all — losers and no-winners.

While the crisis continues to loom, the world has not remained static. New economic players and new patterns of trade have emerged, dramatically changing the nature of trade and larger economic inter-dependence. The map of world greenhouse gases emissions has significantly changed. The internationalization of production processes has led to increased dependency.

In the past decade, the share of developing and emerging economies has risen from one-third to half of global GDP. The value of South-South trade has increased from about one-tenth of total trade to some two-fifths. Developing countries’ share of global exports has jumped from 33 per cent to 43 per cent over the last decade, with China’s exports growing annually at a staggering 20 per cent. A similar picture of shifting composition arises with respect to foreign direct investment. While global FDI inflows have stagnated over the last decade, emerging and developing countries’ share has risen from around 20 per cent to over 50 per cent.

Global trade patterns are also changing rapidly and dramatically. Not too long ago, goods were referred to as “made in China” or “made in Germany”. Today, the expansion of global value chains means that most products are assembled with inputs from many countries. In other words, today’s goods are “made in the world”. At a growth rate of 6 per cent a year, trade in intermediate goods now comprises close to 60 per cent of total trade in goods and has become the most dynamic sector in international trade. Importantly, this trade takes place in high-technology sectors which generate well-paying jobs.

It is clear that this expansion of global value chains is impacting trade policies and politics and requires a new trade narrative. If a significant share of trade involves intermediate goods, it becomes even more important for countries to keep markets open.

An important consequence of the integration of production networks is that imports matter as much as exports and both contribute to job creation and to growth. Value addition along global production chains requires taking a fresher look at the way we measure trade. It also requires reflection about the value of interpreting, as has been done traditionally, bilateral trade balances which in this new pattern become much less relevant, at least for policy and action.

The map of global greenhouse gas emissions has also changed and today it does not look a single bit the way it did yesterday. Emissions of the developing world are rising fast, and China’s emissions are said to be either equal to, or to have actually overtaken, those of the United States. The International Energy Agency tells us that even if OECD countries were to bring their emissions down to zero, the world would still be likely to miss the temperature containment target of an extra 2 degrees Celsius at which the international community is aiming. In such a rapidly changing world, international cooperation is vital to address climate change.

The same can be said of macroeconomic cooperation. As subsequent G20 summits have demonstrated, whether monetary policies, fiscal policies, currencies, the fight against tax havens or regulation of financial activities, a virtuous path requires global cooperation.

However, while new economic and political trends have emerged, the rules governing multilateral cooperation have not kept pace with these changes. In fact, we are to a large extent living on the global rules created in the 90s, the last period of active global governance.

In 2001, governments launched a new round of multilateral trade negotiations, thus acknowledging the need for international trade rules to better reflect the fast-changing pace of trade. More than ten years down the road, despite tough negotiations, Ministers conceded last December that the Doha Round, in its current configuration, was at an impasse.

The same can be said of climate change and more broadly of cooperation over sustainability issues. The Rio Summit in 1992 was a peak in global cooperation with the birth of new conventions on Climate Change, on Biodiversity and on Desertification. Twenty years later, the family of the United Nations gathered in Rio last week had trouble pointing at concrete achievements in what some have dubbed the Rio-20 Summit.

Some days earlier, faced with markets in need of confidence and reassuring, the G20 Summit gathered in Los Cabos and worked hard to send a united message of collaborative actions to address the challenges of growth, fiscal consolidation and financial regulation among other things. But it is only fair to say that progress is slow and there remains a need to provide greater precision, starting with the eurozone.

In fact, the difficulties we are observing in the EU mirror the troubles of the multilateral system, since Europe remains a microcosm of the cosmos. Global governance, the legal and institutional framework to manage the ever-growing interdependence and interconnectedness at the world level, much like the European edifice, is built on a thin balance between disciplines, solidarity and legitimacy. And while the depth of integration is shallower at the global level, the mechanism and dynamics of this balance is not different.

Let me give you two examples. The first draws on my own experience with the Doha Round of trade negotiations; the second relates to the multilateral action to address climate change.

The GATT, the predecessor of the WTO, relied on the notion of “special and differential treatment” of developing countries. In broad terms, this implied that, while developed countries agreed to open their markets, developing countries were not expected to fully reciprocate. This arrangement reflected the balance between disciplines, solidarity and legitimacy in the pre-WTO multilateral trading system.

In recent years, however, the impressive growth rate of certain developing countries has caused a big shift in the global economy and has moved the trading system out of its equilibrium. For some, emerging economies have attained a level of development that warrants greater reciprocity of obligations; while for others, the income gap with the advanced countries renders equality of disciplines unfair. The inability to find a new balance in the multilateral trading system has so far made it impossible to conclude the Doha Round.

In many ways, reaching a meaningful agreement on a global response to climate change faces similar challenges. The 1992 Earth Summit Declaration in Rio recognized that, even though all countries bear a responsibility to address climate change, countries have not all contributed equally to causing the problem, nor are they all equally equipped to address it.

The principle of “common but differential responsibility” was introduced in the 1997 Kyoto Protocol that established specific and binding emission reduction commitments for developed countries. Developing countries had no binding obligation. The challenge now facing climate change negotiators is to agree on a multilateral response after the Kyoto Protocol’s first commitment period has expired in a world where developing-country growth has outstripped developed-country growth.

In the last couple of years, a worrying attitude has emerged towards multilateralism. In stark contrast to the calls for greater and improved international regulatory coherence that dominated the headlines during the outbreak of the global financial crisis in 2008, international cooperation has slumped to an ever more precarious state.

Cynical observers of international relations would say that over the past decade, international efforts to forge legally binding agreements have continued to set the threshold of expectations so low that even an agreement to continue to talk is considered a successful outcome.

By this standard, the fact that last year’s climate change talks in South Africa, the 8th Ministerial Conference of the WTO in Geneva, the recent UNCTAD XIII Conference, the G20 summit in Mexico and the Rio+20 summit did not collapse in acrimony can be considered an important achievement for multilateralism.

In my view, such cynicism ignores the fundamental lessons about international cooperation which we have learned over the past century. Most of all, it disregards the fact that for most countries more multilateralism and more international cooperation remain the only sustainable way forward.

Certainly, the changes of the past few years dictate a re-configuration, rethink and adjustment of traditional multilateral cooperation, including in the WTO. The proliferation of different informal coalitions and groups of countries and civil society, such as the G8+, G8+5, G20, B20 and L20, to name but a few, are symptomatic of the constantly evolving nature of international relations today.

However, I believe that their effectiveness will depend on whether they are representative enough to address the increasingly complex challenges on our agenda. A stable global economy cannot be built without including all key stakeholders in the decision-making process. The architecture of global governance needs to adjust and the international institutions that represent it need to become more inclusive and agile so as to ensure enhanced and coherent multilateral cooperation.

More fundamentally, I believe that while the crisis continues to hit national systems hard, it will be very difficult to achieve high-standard multilateralism. Indeed, in what remains a Westphalian system, a strong multilateral system requires first and foremost strong national systems, since the essence of the consensus building remains within the nation state.

Contrary to conventional wisdom, international agreements necessitate a high quantum of political energy at home. They require strong political leadership because they are about bringing domestic constituencies on board. They are about crafting compromises which benefit some but also hurt others. This will remain true as long as the legitimacy of international systems remains weak as compared to national systems.

This situation is a dangerous one, as it risks turning into a vicious circle: exiting the crisis sooner rather than later implies strong leadership to craft the necessary international cooperation agreements. But governments’ legitimacy is weakened by popular discontent generated by the economic and social hardship. This erodes the ability to act together, which in turn further prolongs the crisis, leading to a syndrome of “too little, too late”. Such is very much the case today with the European situation.

I believe that multilateralism is at a crossroads. Either it advances in the spirit of shared values and enhanced cooperation, or we will face a retreat from multilateralism, at our own peril. Without global cooperation on finance, security, trade, the environment and poverty reduction, the risks of division, strife and war will remain dangerously real. Waiting for better times will simply not suffice. A consensus for inaction would simply mean a consensus for more pain for all. We must, together, be bolder to cope with growing risks.

Thank you for your attention.

ABOUT: Pascal Lamy is the fifth Director-General of the WTO. His appointment took effect on 1 September 2005 for a four-year term. In April 2009 WTO members reappointed Mr Lamy for a second four-year term, starting on 1 September 2009.

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